The pensions world is very interested in the upcoming pensions review on adequacy and retirement outcomes. There is widespread concern about the level of contributions people, employers and Government are paying into private pensions and thought will need to be put into how to increase contribution levels to meet retirement income adequacy measures such as targeted working life replacement rates or the Pensions and Lifetime Savings Association’s (PLSA’s) hitting the target lifestyle measures.
Ensuring that people save enough into private pensions is vital and the Government will definitely need help in determining what measure should be used for adequacy and the level of contributions made in the future.
I think for the review to result in meaningful and long lasting improvement in pensioner living standards there needs to be two other dimensions considered along pension contributions – housing and long term care.
There is a danger in focusing solely on reaching a certain level of retirement income through a combination of State Pension and private pensions without being clear about external factors which could undermine pensioner ability to achieve expected living standards through income erosion.
With housing, there is a clear and present danger – 17% of pensioners will be renting privately in 2041, up from 6% in 2023. Private renting is insecure – rental prices are unpredictable and can rise, eroding disposable income. The more pensioners privately renting in future, the fewer people who can sustainably maintain adequate standards of living on incomes calculated to allow them to achieve these.
Alongside housing, the potential need for care is another threat to adequate income streams. This age UK factsheet states that residential care costs around £1,000 per week, though I have heard of some people being charged £2,000 to £5,000 a week. This quickly adds up, for example, £1,000 a week = £52,000 a year. While those in receipt of annuity or drawdown income will not have to cash in their savings to provide themselves with care and can pay a tariff to the local authority to receive care based on an income means test, some people may wish to go privately and pay the full amount for care of their choice in their final years. Others may pay for care out of non-pension savings and assets which were intended for retirement support.
So the need for care can erode your pensions income, any income your surviving spouse expects to depend on, or the savings of children who are financially supporting parents.
To properly determine a target income or lifestyle for pensioners, there needs to be a security underpin. It’s all well and good to say people need to achieve 66% of working life income in the first year, but if in the 2nd, 3rd or 10th year, the power that income has to provide a certain standard or living is eroded due to housing costs or one’s own, one’s partner’s or one’s parent’s care needs – then that rate is not a proper adequacy target.
How do we fix this? There are a myriad of potential solutions which lie in housing policy, benefits policy and state funding. In the meantime, the message we need to communicate to government is that an adequacy target may be essentially meaningless unless there are facilities for ensuring it can sustainably provide an adequate income throughout retirement.
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